Financial Market Worksheet - Commerce Business Studies (BST) Class 12

Multiple Choice Questions (MCQs)

Q1: What is the primary function of a financial market?
A) To provide loans to individuals
B) To facilitate the transfer of funds from savers to borrowers
C) To regulate interest rates
D) To control inflation

Ans: (B)

Explanation: The primary function of a financial market is to channel funds from those who have surplus savings (households, firms, institutions) to those who need funds for productive use (businesses, governments). This transfer helps in the mobilisation of savings, efficient allocation of capital, and supports economic growth by enabling investment and consumption where needed.

Q2: Which of the following is NOT a type of money market instrument?
A) Treasury Bill
B) Commercial Paper
C) Equity Shares
D) Certificate of Deposit

Ans: (C)

Explanation: Money market instruments are short-term debt instruments with maturities usually of less than one year, such as Treasury Bills, Commercial Paper, and Certificates of Deposit. Equity shares represent ownership in a company and are long-term instruments traded in the capital market, not the money market.

Q3: What does the capital market primarily deal with?
A) Short-term funds
B) Long-term funds
C) Daily transactions
D) Currency exchange rates
Ans: B) Long-term funds

Ans: (B)

Explanation: The capital market provides funds for long-term needs through instruments like stocks and bonds. It helps companies raise capital for expansion, supports infrastructure projects and long-term investments. In contrast, the money market handles short-term borrowing and lending.

Q4: Which institution is responsible for regulating the securities market in India?
A) Reserve Bank of India
B) Securities and Exchange Board of India
C) Bombay Stock Exchange
D) National Stock Exchange
Ans: B) Securities and Exchange Board of India

Ans: (B)

Explanation: The Securities and Exchange Board of India (SEBI) is the statutory regulator for the securities market in India. SEBI's duties include protecting investor interests, ensuring market transparency and fairness, and regulating intermediaries and market practices. The RBI regulates banking and monetary policy, while BSE and NSE are market platforms, not regulators.

Q5: What is the main purpose of a stock exchange?
A) To provide loans to companies
B) To allow companies to raise funds
C) To help investors buy and sell securities
D) Both B and C
Ans: D) Both B and C

Ans: (D)

Explanation: A stock exchange enables companies to raise long-term capital by issuing shares (primary market) and provides a platform for investors to buy and sell securities (secondary market). This creates liquidity, aids price discovery, and allows investors to enter and exit investments efficiently, so both B and C are correct.

Fill in the Blanks

Q1: The process of converting a share certificate from physical form to electronic form is called __________.
Ans: Dematerialisation

Q2: The __________ market deals with short-term funds and monetary assets with a maturity period of up to one year.
Ans: Money

Q3: The __________ is where securities are sold for the first time to raise long-term capital.
Ans: Primary market

Q4: SEBI was established in __________ to protect the interests of investors.
Ans: 1988

Q5: A __________ is a short-term unsecured promissory note issued by creditworthy companies.
Ans: Commercial Paper

True or False

Q1: The capital market only deals with short-term financial instruments.
Ans: False

Explanation: The capital market deals with long-term instruments such as stocks and bonds. Short-term instruments belong to the money market.

Q2: The National Stock Exchange was established in 1992.
Ans: True

Explanation: The National Stock Exchange (NSE) was set up in 1992 to provide a modern, fully electronic trading platform and to increase market transparency and efficiency.

Q3: Liquidity in a financial market allows investors to easily buy and sell assets.
Ans: True

Explanation: Liquidity means assets can be converted into cash quickly and at a fair price. High liquidity reduces the time and cost of trading, making the market more attractive to investors.

Q4: Commercial bills are used to finance long-term investments.
Ans: False

Explanation: Commercial bills (or trade bills) are short-term instruments used to finance working capital and short-term trade needs, not long-term investments.

Q5: SEBI's primary role includes protecting the rights and interests of investors.
Ans: True

Explanation: A core objective of SEBI is investor protection. It regulates market participants, prevents unfair practices like insider trading, and enforces disclosure norms to safeguard investors.

Short Answer Questions

Q1: What is a financial market?
Ans: A financial market is a place or system where buyers and sellers trade financial securities, such as stocks, bonds and money-market instruments. It enables people to save and invest and helps businesses and governments to raise funds for productive activities, which supports economic growth and employment.

Q2: What are the two main types of financial markets?
Ans: The two main types are the money market and the capital market. The money market deals with short-term funds (maturities up to one year), while the capital market deals with long-term funds for instruments such as shares and bonds.

Q3: What is a stock exchange?
Ans: A stock exchange is a regulated marketplace where securities like shares and bonds are listed and traded. It provides companies with access to capital and gives investors a structured, transparent platform to buy and sell securities, ensuring liquidity and price discovery.

Q4: What does SEBI do?
Ans: The Securities and Exchange Board of India (SEBI) regulates the securities market to promote fair practices and protect investors. It frames rules for market intermediaries, monitors transactions to prevent fraud, enforces disclosure requirements and conducts investor education and grievance redressal.

Q5: What is dematerialisation?
Ans: Dematerialisation is the process of converting physical share certificates into an electronic (digital) form held in a Demat account. This simplifies trading, reduces paperwork and lowers the risk of loss or forgery of certificates.

Long Answer Questions

Q1: What are the primary functions of financial markets, and how do they contribute to economic growth?
Ans: Financial markets perform several key functions that support economic development:

• Mobilisation of Savings: They collect savings from households and institutions and channel them to productive uses, ensuring funds are available for investment.
• Facilitating Price Discovery: Through trading, markets determine the fair prices of financial assets based on supply and demand, helping investors make informed choices.
• Providing Liquidity: Financial markets allow investors to sell or buy assets quickly, so funds are accessible when needed.
• Reducing Transaction Costs: By centralising information and matching buyers with sellers, markets lower the costs of trading and encourage greater participation.
• Risk Management: Markets offer instruments (like derivatives, insurance-linked products) that help participants hedge or spread risk, creating a more stable environment for investment.

Together, these functions promote investment, improve capital allocation, and increase economic efficiency, which leads to higher output, employment and sustainable growth.

Q2: Compare and contrast the money market and the capital market in terms of instruments, participants, and purposes.
Ans: Key differences between the money market and the capital market are:

• Instruments: Money market instruments include Treasury Bills, Commercial Paper and Certificates of Deposit. Capital market instruments include equity shares, debentures and long-term bonds.
• Maturity Period: Money market instruments have maturities of one year or less; capital market instruments have longer maturities, often several years.
• Participants: Money market participants are usually banks, financial institutions and large corporations seeking short-term funds. Capital market participants include individual investors, mutual funds, pension funds and companies seeking long-term finance.
• Purpose: The money market provides liquidity and meets short-term funding needs. The capital market raises long-term funds for growth, expansion and capital formation.
• Risk and Return: Money market instruments are lower risk with lower returns; capital market instruments generally offer higher potential returns with higher risk.

Q3: Explain the role of stock exchanges in the financial market and their importance to investors and companies.
Ans: Stock exchanges play several vital roles:

• Liquidity: Exchanges provide a market where securities can be bought and sold easily, giving investors access to cash when required.
• Price Determination: They enable price discovery through continuous trading, reflecting supply and demand for securities.
• Transparency: Regulated exchanges require disclosure by listed companies and monitor trading, which builds investor confidence.
• Access to Capital: Companies can raise funds through public issues and listings, which supports expansion and long-term projects.
• Investor Protection and Regulation: Exchanges operate under regulatory oversight and provide grievance mechanisms and market surveillance to reduce malpractices.

Q4: Discuss the significance of SEBI in regulating the securities market and protecting investors.
Ans: The Securities and Exchange Board of India (SEBI) is significant for several reasons:

• Regulatory Authority: SEBI frames rules for securities markets, registers and supervises intermediaries, and enforces compliance to maintain orderly markets.
• Investor Protection: It prevents insider trading, fraud and market manipulation, enforces disclosure norms and facilitates redressal of investor grievances.
• Market Development: SEBI promotes market infrastructure, new products and competition, enhancing market depth and reach.
• Education and Training: It organises investor awareness programs and training for intermediaries to improve market literacy and conduct.
• Continuous Monitoring: Through surveillance and enforcement, SEBI helps maintain market integrity and investor trust.

Q5: Describe the process of trading in a stock exchange, including the role of brokers and the importance of technology.
Ans: Trading on a stock exchange follows a defined sequence:

• Registration with a Broker: Investors open accounts with a registered broker and a Demat account to hold securities electronically.
• Placing Orders: Investors place buy or sell orders through their broker, who inputs these orders into the exchange's trading system.
• Order Matching: The exchange's electronic system matches buy and sell orders based on price and time priority to execute trades efficiently.
• Trade Confirmation: After execution, the broker provides a contract note and trade confirmation to the investor for records.
• Settlement: In settlement, securities are transferred to the buyer's Demat account and funds are transferred to the seller, typically within the exchange's settlement cycle. Clearing corporations and depositories ensure this process is secure.
• Role of Technology: Modern exchanges depend on high-speed electronic platforms for order routing, matching and settlement, which reduce transaction time, costs and operational risk while increasing market access and transparency.